House Republicans consider next ESG actions

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the environmental, social, and corporate governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG developments this week

In Washington, D.C.

House Republicans consider next ESG actions

House Republicans held hearings, issued statements, and passed out of committee various bills  related to ESG in July. The discussion has now turned to how they intend to move forward with their plans to oppose ESG:

Prior to departing for the August recess, Chairman Patrick McHenry (R-NC) wrapped up the month-long series of hearings considering digital assets and environmental, social, and governance (ESG) legislation. In tandem markups held on 26 July and 27 July, HFSC advanced several bills on these issues, both on a bipartisan basis (digital assets and stablecoin) and along party lines (anti-ESG bills). Prior to the ESG markup, HFSC Republicans had released 18 bills that would be under consideration. However, these bills were then bundled into a few larger packages, which was done in a way that largely precluded Democratic support, as they were then tied to provisions that only Republicans would support. …

Chairman McHenry will likely push for full House consideration of these bills now that Congress has returned from the August recess. The top Congressional priorities are consideration of the FY2024 appropriations bills, the FY2024 National Defense Authorization Act, the Federal Aviation Administration reauthorization, and the Farm Bill. However, given Chairman McHenry’s standing with the House leadership, we expect the Republican-led House may consider and pass the HFSC bills. In a narrowly divided House and an even narrower Senate, it is possible there will be room for bipartisan agreement on some of these issues going forward, though that may prove more difficult as we get closer to the 2024 presidential election. 

Another factor involved in the Congressional focus on ESG is the Securities and Exchange Commission’s (SEC) long-awaited final rule on climate risk disclosures and proposed rule on human capital disclosures. Both rulemakings are listed on the SEC’s Unified Regulatory Agenda with potential actions in October 2023. However, the timing remains unclear and these rulemakings could slip into 2024 given the ongoing controversy and threat of litigation. When the respective proposed and final regulations are issued, it is likely to spur increased attention and oversight, particularly by House Republicans. Regardless, we should expect a continuing focus on ESG in Congress as a proxy battle for more fundamental political and policy differences on the role of government.

House Democrats make plans to counter the ESG pushback

Congressional Democrats are also focused on ESG and pushing back against opposition to the investing strategy:

When Republicans began trumpeting plans to crack down on green-minded investments following their House takeover, Democrats started preparing a counterattack.

The result was the mobilization of the Sustainable Investment Caucus, conceived of as an educational clearinghouse for members of both parties on environmental, social and governance investing, known as ESG.

With Republicans wanting to make policy and political gains against the practice, the caucus has become a de facto messaging war room for Democrats.

“I think we beat the snot out of them, from a political perspective,” said co-chair Rep. Sean Casten (D-Ill.). “We made them answer to the truth.”

Casten and the caucus’ other chair, Rep. Juan Vargas (D-Calif.), deployed their strategy in July when the House Financial Services Committee convened six hearings and a markup over the course of two weeks during what was dubbed “ESG Month.” …

Democrats characterized Republican opposition to ESG as anti-capitalist, discouraging market choice and investor freedom by suggesting ESG factors should not be taken into account.

They accused Republicans of endangering retirement accounts by denying financial managers access to critical data, and berated them for ignoring the realities of climate change as a serious financial risk.

The talking points came from a 32-page memo the Sustainable Investment Caucus prepared and distributed among Financial Services Committee Democrats.

The group also held a series of staff and member briefings, and office-to-office outreach over several months to educate and prepare lawmakers.

As a result, many Republicans had to use their speaking allotments during the hearings and markup to defend themselves against comparisons to communist leaders or dispute characterizations that their party had abandoned President Ronald Reagan. …

Vargas and Casten said creating the caucus was about being prepared to go head to head with anti-ESG forces if necessary, which necessitated addressing the obvious knowledge gaps around ESG on Capitol Hill, even within their own party.

At the official launch event in late January, the only other lawmaker to join Vargas and Casten was freshman Rep. Seth Magaziner (D-R.I.), a former state treasurer who also once worked as vice president of an ESG investment firm. Since that time, the group has grown to 19 members.

“As Republicans kept harping on this more and more, Democrats, I think, began to realize this was a space where they needed to be knowledgeable,” Magaziner said.

The intention was to have pro-ESG Republicans join the caucus, but invitations were either rejected or ignored, turning the Sustainable Investment Caucus into a partisan entity by default.

This enabled Vargas and Casten to team up with House Financial Services ranking member Maxine Waters (D-Calif.) to conduct joint background briefings and produce a complementary set of memos prior to the flurry of July hearings.

The Sustainable Investment Caucus’ messaging document included exhaustive context about each of the scheduled hearings and lists of sample questions to ask invited witnesses.

“We were prepared,” said an aide to a Democratic member of the Financial Services Committee. “We were all singing from the same song sheet.”

In the states

Oklahoma pension board votes to retain financial advisors, including BlackRock

Some state legislators have passed laws in recent years that prohibit the use of ESG in state investments. State financial officers in some states have used their executive power to do the same and have been working to enforce those new laws. But as the recent experience of Oklahoma Treasurer Todd Russ (R) demonstrates, sometimes things don’t go according to the plans of state officials:

Republican politicians aiming to punish Wall Street firms over sustainable investing policies that they say are hurting everyday Americans are meeting resistance from officials in their own states.

The latest example is from Oklahoma, where the Public Employees Retirement System’s board voted to retain its current roster of financial advisers, including BlackRock, after deciding that complying with a 2022 state law that bars doing business with firms accused of boycotting fossil fuels would violate its fiduciary duty. …

BlackRock, the world’s biggest asset manager, was on the state’s boycott list along with JPMorgan Chase, Bank of America and State Street.

The conflict reflects the tension between GOP lawmakers looking to score political points by attacking companies over environmental, social and governance principles, and fiduciaries who are more concerned about their potential culpability for the financial costs the anti-ESG actions could impose on retirees and taxpayers. Oklahoma’s law permits exemptions in cases where fiduciaries determine that avoiding the blacklisted firms would result in a “loss in value.”

Oklahoma state treasurer Todd Russ, the only OPERS board member to vote against the exemption, said he’s concerned that the fund isn’t complying with the law.

“They were concerned they’d get sued if it cost the pension money,” said Russ, whose office publishes the state’s energy boycott list. “I told them I’m more concerned that we’ll get sued if we’re in violation of statute and state law.”

Oklahoma Insurance Commissioner Glen Mulready, who has representatives on three different state pension boards, including OPERS, said that he was more concerned about lawsuits from the pensioners themselves and that he thinks the issue will come up for other pension boards in the state.

“Everyone that I know of I think is probably leaning in the same direction and that is taking the exemption because of the financial impact on the pension fund,” he said.

It’s not just Oklahoma doing the anti-ESG dance. In Texas, public pension funds have slow-walked divesting from firms on that state’s boycott list. Some funds in Kentucky have said complying with that state’s energy boycott law would violate its fiduciary duty.

“The process has played out very differently throughout the states,” said West Virginia Treasurer Riley Moore, a Republican congressional candidate who leads an anti-ESG coalition that has spurred the divestment actions in red states.

In the spotlight

ESG reporting regulations could make markets more complicated, according to analyst

In a piece for Canada’s Financial Post, markets/finance writer Terence Corcoran argued that, while it is easy to talk like an advocate of ESG, global ESG reporting standards will, in his view, make business and markets more difficult and complicated:

In an underground retail passage leading to the Toronto subway at the intersection of Bloor and Yonge — a retail row owned by Brookfield Properties — many of the stores sit in post-COVID shutdown. To fill some of the empty window space, Brookfield has erected a billboard. Instead of erecting a “For Lease” sign, the billboard calls on subway passengers to join in “BREAKING THE PLASTIC HABIT.”

Commuters are asked to scan a QR code so they can promise to “Skip the plastics.” The scan opens on a page that says “Take the pledge!” by ticking a box that says “I pledge to Break the Plastic Habit” and another that says “My workplace pledges to Break the Plastic Habit.”

How cheap and easy it must be for a global real estate company to take public shots at the plastics industry, especially for a company like Brookfield Properties, a subsidiary of Brookfield Asset Management, which is chaired by Mark Carney, former central banker and leading global proponent of corporate adherence to strict environmental, social and governance (ESG) practices.

Plastics have been a Blookfield ESG target for years. Along with the world’s biggest asset managers and corporations, from such trillion-dollar giants as BlackRock to Canada’s major banks and down to airlines and Liberty Gold, a 30-cent-a-share mining company, the investment world has been churning out millions of pages of feel-good reports on how they are managing their way through a labyrinth of often unmeasurable aspects of their operations.

That struggle is set to turn into a regulatory nightmare as governments, financial houses, corporations and regulators attempt to create international standards to document and measure business operations that are largely unmeasurable.

The ESG regulatory hurricane is sweeping across Europe, North America and Asia. …

[C]oming soon is the need to document what is called “Scope 3” carbon emissions. In short, corporations will soon be forced to report not only on their direct carbon emissions but on “all indirect emissions … that occur in the value chain of the reporting company, including both upstream and downstream emissions.”

Scope 3 emissions targets are a product of the Greenhouse Gas Protocol Corporate Standards (GGPCS) regime, which is only one small aspect of an alphabet soup of rules that’s about to drown corporate managers and investors. …

ESG is a massive regulatory and corporate reform nicely described by Stuart Kirk, a former HSBC responsible investing executive, as “death by fatuous and incomparable data.”

One thing is certain about ESG regulatory reform: Taking the Brookfield Plastics Pledge was the easy part. The worst is yet to come.